NIGERIA: MEETING WITH SPECIAL ADVISOR FOR

C O N F I D E N T I A L SECTION 01 OF 03 ABUJA 001624

SIPDIS


E.O. 12958: DECL: 07/06/2006
TAGS: EPET ELAB ECON NI
SUBJECT: NIGERIA: MEETING WITH SPECIAL ADVISOR FOR
PETROLEUM RILWANU LUKMAN--DOWNSTREAM DEREGULATION STILL ON
TRACK; REFINERY REHABILITATION MISHANDLED


REF: A. ABUJA 1530

B. ABUJA 742

C. LAGOS 1077



1. Classified by Ambassador Howard Jeter for reasons 1.5
(B) and (D).





2. (C) Summary: On June 22 Ambassador Jeter, DOE
Energy Advisor Brodman, and Econoff Flook (notetaker)
met in Abuja with Special Advisor to the President for
Petroleum Affairs and Energy, Dr. Rilwanu Lukman.
During the meeting, Dr. Lukman indicated that the GON
has no choice but to proceed with fuel price
deregulation as planned. Public sensitivity to
deregulation makes this an explosive political issue as
Nigeria gears up for the 2003 Presidential elections.
In addition, Lukman revealed that the turn-around
maintenance (TAM) contracts for Nigeria's refineries
have been badly mishandled, and as a result Nigeria's
four refineries remain in a dismal state. DOE Energy
Advisor Brodman described and again offered USG
technical assistance in the areas of deregulation,
pipeline security, and safety, an energy assistance
program funded through prior year Economic Support Funds
(ESF). Dr. Lukman welcomed this offer and agreed to
follow-up with his staff. Other issues discussed
included upstream exploration and production
developments (Ref A) and climate change (Septel). End
Summary.




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GON Plans on Deregulation
--------------





3. (SBU) During the hour and 30 minute meeting,
Ambassador Jeter asked if the GON intended to proceed
with petroleum deregulation. Many observers believe
that President Obasanjo can ill afford to implement this
controversial policy given the sustained public protest
following the GON's previous announcement to do so
(Reftel B provides a detailed analysis of deregulation).
Some political analysts, as mentioned in Reftel B, argue
that Obasanjo would sacrifice his future political
ambitions, if he implements deregulation while Nigeria
begins to focus on the 2003 elections. Energy sector
insiders predict that the GON will continue to press for
price deregulation, but that actual implementation will
be delayed until after the 2003 presidential elections.
Some question if the GON has made a final decision on an
implementation time frame.





4. (SBU) Dr. Lukman confirmed that the GON is
proceeding with deregulation "as planned". He said that
the GON has no choice but to do so. (Comment: This
response is an about-face from the deregulation
discussion that DOE Energy Advisor had with Dr. Lukman
in August 1999, when Lukman refused to take a firm
position on deregulation. End Comment.) Lukman noted
that Special Assistant to the President for Petroleum
Matters, Engineer Funsho Kupolokun, and Minister for
National Orientation and Information, Professor Jerry
Gana have been tasked by President Obasanjo to gain
public support for deregulation. Kupolokun is engaged
in a state-by-state lobbying campaign. The apparent
strategy is to bring as many state governors and
political leaders into the pro-deregulation fold as
possible; then utilize these allies to educate the
masses on the benefits of deregulation.




5.(C) In discussing labor's sustained resistance to
deregulation, Ambassador Jeter commented that he met the
National Labor Congress (NLC) leader, Mr. Adams
Oshiomhole, several months ago in Lagos (Reftel C).
(Comment: Oshiomhole is a vocal opponent of
deregulation, and the impact of NLC labor strikes on the
economy provides the NLC considerable influence over
this issue. End Comment.) The Ambassador recalled that
during that discussion, the NLC President indicated that
the NLC was in fact willing to cooperate with the GON on
deregulation. Dr. Lukman responded that the NLC has not
been cooperative, and the NLC leadership is beholden to
the masses. Lukman went on to opine that "Adams
Oshiomhole is just a little too bright," implying that
Oshiomhole changes his tune depending upon the audience.
Dr. Lukman stated that the message the Obasanjo
Administration wants to get across to the NLC, and to
the public at large, is that the GON is spending
massively on petroleum subsidies, and this money could
be put to better use in areas such as health care,
education, and business development, all "democracy
dividends" that the public is clamouring for.

6. (C) Ambassador Jeter shared with Lukman a proposal
where the USG may be able to assist the GON with
deregulation efforts. One aspect of this proposal could
be targeted specifically at the NLC and other labor
organizations. Another program could focus on political
groups and leaders. On the labor side, all parties
agree that a confrontation between labor and the GON
would be counter-productive. The proposal Ambassador
Jeter described would educate labor leaders on the
positive aspects of deregulation, and its long-term
benefits for Nigeria. Such a program would link
Nigerian labor leaders with counterparts in countries
where petroleum deregulation efforts have worked. A
similar program could be designed for political leaders
and parties. Both programs would bring foreign experts
to Nigeria to speak about the benefits of price
deregulation. Another possibility is to sponsor
Nigerian official travel to countries where deregulation
has been successful. The Ambassador suggested that this
type of assistance may require a "silent partner"
relationship, given the public sensitivity to
deregulation. Lukman welcomed this idea and thought
that our interest and low-key assistance might help.




--------------
Refineries Remain in Dismal Condition
--------------





7. (SBU) Also raised during the discussion was the
condition of Nigeria's four refineries. Ambassador
Jeter remembered that hundreds of millions of dollars
had been set-aside during the interim Abubaker
Adminstration to "fix" the refineries, but it appeared
that very little had been done. Dr. Lukman was very
frank in his condemnation of the ongoing turn-around
maintenance contracts. He said that these deals have
been badly mishandled, and as a result there has been
little improvement in the refineries' production
capacity. In his view, the solution is to allow present
TAM contractors to complete projects, even if badly, and
then move to sign new contracts with other firms. He
opined that once the GON officials who oversaw the
present TAM contracts "are out of the way," (implying
that they would be fired) new contracts would be awarded
to firms more reliable and competent to complete the
task at hand.




--------------
Pipeline Security and Safety
--------------





8. (C) Another USG technical assistance offer discussed
was a pipeline security and safety program. DOE Energy
Advisor Brodman described a USG study which evaluated
how different countries around the world have addressed
pipeline security and safety. Using this study, and the
successful examples of other countries, a program could
be designed by the U.S Department of Energy and the
Department of Transportation. This assistance would
look at ways to address Nigeria's ongoing pipeline
security and safety problems. Program possibilities
include a "needs assessment" and various training
opportunities. Again, Lukman welcomed the offer of
assistance both in the areas of deregulation and
pipeline security and safety. It was reiterated to Dr.
Lukman that given the sensitivity of these issues, it
would be best not to publicize the U.S. role.





9. (SBU) Note: The GON has continually battled the
problem of pipeline sabotage. This practice targets all
types of pipelines. "Product" pipelines, which
transport gasoline and other petroleum products, are
often tapped and refined products are siphoned off.
This activity occurs at all levels, from organized
criminal gangs with tanker trucks, down to the local
villager with a plastic bucket. Other types of
pipelines, including crude oil pipelines, are targeted
for various other reasons including theft of crude and
sabotage. The end result of these practices is a heavy
loss of lives, environmental degradation, and supply
disruptions.



10. (SBU) Comment: Nigeria is a tale of paradoxes. On
the one hand the country has abundant hydrocarbon
reserves, both in crude oil (25 billion barrels) and
also natural gas (159 trillion cubic feet).
Unfortunately, ongoing upstream prospects and excitement
do not transcend to the downstream side of the industry
where domestic refining, distribution, and regulatory
systems are fiascos. Dr. Lukman confirmed what many
industry insiders have reported: Nigeria's refineries
remain in dismal condition, official refinery production
figures are often inaccurate, and frequent GON
statements that all refineries are working near "full
capacity" are plainly misleading.





11. (SBU) Comment Cont. The good news is that the
Obasanjo Administration appears intent on implementing
fuel price deregulation. This policy shift, if
implemented, should have a profoundly positive impact on
the Nigerian economy. In Lukman's words it will free up
petroleum subsidies to be put to better use elsewhere.
As for cross-border smuggling; "if we charge an
appropriate price they (Benin and Niger) can take as much
as they want." Press reports indicate that domestic
gasoline consumption has gone up from 12 million litres
per day in 1999 to the present level of 25 million
litres per day. Dr. Lukman indicated that these figures
are inaccurate. However, in our view these numbers do
give some indication of the phenomenal growth in demand
and how, via a GON fuel price subsidy, a great number of
petroleum smugglers are growing rich, either by
supplying the domestic "black market" or through cross-
border smuggling.
Jeter